The European Central Bank’s intricate independence versus accountability conundrum in the post-crisis governance framework

A. An omnipotent ECB?

The ECB’s approach to monetary policy during the crisis has changed in favour of a more expansive interpretation of its primary statutory mandate, which is to maintain price stability in the euro area. ⁵ To be sure, this observation is presently not to be (mis-)read as an implicit legal appraisal of the ECB’s crisis measures, but rather as a factual observation. Since 2008 the ECB could be seen taking ‘(…) bold measures to maintain price stability (…)’, thereby moving ‘(…) beyond its conventional policy instruments (…)’, ⁶ inter alia engaging in fixed-rate full allotment policy in refinancing operations, targeted longer-term refinancing operations, several covered bond purchasing programmes, and the gradual shift to a negative deposit facility rate. ⁷ Of all the unconventional measures taken, the several asset purchase programmes that the ECB has operationalized and, in one instance, announced, have taken centre stage in the debates on the scope of the competence of the ECB and the legality of its crisis-related measures. This concerns, namely, the ECB’s interpretation of its primary objective in a way that has allowed for the announcement in 2012 of the Outright Monetary Transactions (OMT) programme, as well as the implementation of the secondary markets public sector asset purchase programme (PSPP) (also known as ‘Quantitative Easing’) from 2015 onwards. ⁸

Without presently reiterating all the arguments put forward in favour of or against the compatibility of the asset purchasing programmes with EU law, most prominently by the German Federal Constitutional Court (BVerfG) in its first-ever preliminary reference to the Court of Justice of the European Union (CJEU) on the compatibility with EU law of the OMT, ⁹ it can be observed that the CJEU in Gauweiler in principle has confirmed the reading of the wide, albeit certainly not infinite, freedom of the ECB in formulating and implementing its monetary policy objective. ¹⁰ While the CJEU refers to the ‘tightly drawn nature’ of the monetary policy mandate, it actually acknowledges a relatively broad room for manoeuvre for the ECB, arguing that it is the envisaged objective of a given measure that is the decisive criterion in determining what the nature of that measure is. ¹¹ The fact that an ECB measure may also contribute to the stability of the euro area and thus, economic policy, is not considered to deprive that measure of its monetary policy character, whereas indirect effects on the stability of the euro alone do not turn an economic policy measure into a monetary policy one. ¹²

In economic terms, the seemingly sharp legal distinction between monetary and economic policy (mainly prompted by the current attribution of competences in primary EU law) is built on quicksand (as the reference by the CJEU in Pringle, Gauweiler, and Weiss and others to the mutual effects of measures adopted in the name of one or the other policy objective, seems to confirm), if not being altogether indiscernible. ¹³ What can be observed since the breakout of the crisis is what Borger refers to as ‘(…) a change in the stability conception underlying the single currency from one that is predominantly focussed on price stability to one that takes into consideration financial stability as well’. ¹⁴ Indeed, maintaining the financial stability of the monetary union has been identified by the CJEU as ‘a higher objective’ to which the principle of market discipline inter alia underlying Article 125 of the Treaty on the Functioning of the European Union (TFEU) contributes. ¹⁵ To the extent that the notion of ‘financial stability’ can be considered to actually refer to the overall objective for Member States’ economic policies in the EMU and thus, fiscal stability, rather than the stability of the financial markets, the reference in Article 136(3) TFEU to the stability of the Eurozone can be understood as an introduction of this stability conception into primary law. ¹⁶ Both in its role as monetary policy authority and as prudential supervisor, the ECB currently plays a major role both in safeguarding fiscal and financial stability.

The position of the ECB is also strengthened by the CJEU’s approach to the standard of review for monetary policy decisions, which emphasizes the ‘choices of a technical nature and to undertake forecasts and complex assessments’ involved in the preparation and implementation of open market operations, and allows the ECB broad discretion. ¹⁷ Whether the CJEU’s reference to the principle of proportionality ¹⁸ provides a ready-made solution scheme for the handling of disputes on the limits of the ECB’s independent monetary policy competence is questionable. As Goldmann observes:

Tight control seems (…) [only] feasible if monetary policy was an objective, mathematical craft. This, however, is not the case. Different approaches to monetary policy and the high level of uncertainty surrounding its effects make it very difficult to review in a marginally objective way whether a specific monetary policy is proportionate without engaging in the making of monetary policy. ¹⁹

The ECB’s broad room for manoeuvre as a monetary policy authority can also be discerned from the fact that the CJEU has not considered the ECB’s linking of its announced OMT programme to the compliance with the obligations arising from financial assistance programmes as a problematic mingling of monetary and economic policy. Advocate General Cruz Villalón in Gauweiler had concluded that ‘the ECB’s role in the design, adoption and regular monitoring of those programmes is significant, not to say decisive’, and that against this background the purchase of debt securities of a Member State may be perceived ‘as an instrument which serves macroeconomic conditionality’, thereby detracting from or distorting the pursued of the monetary policy objectives of the OMT programme. ²¹ Yet, rather than to consider this connection as proof of the ECB’s direct involvement in economic policy matters, ²² the CJEU stated that this arrangement is a safeguard to ensure ‘(…) that the monetary policy measures it has adopted will not work against the effectiveness of the economic policies followed by the Member States’. ²³ In doing so, in the opinion of the European judges the ECB pursues its secondary monetary policy objective laid down in Article 127(1) TFEU that is to contribute to the general economic policies in the EU. To be sure, the scope of this secondary objective is is certainly broader than what the ruling may suggest. ²⁴

The sphere of influence of the ECB has also increased through the establishment of the SSM. For its SSM-related tasks, the ECB enjoys a degree of insulation from day-to-day political influencing that, if not altogether covered by the scope of primary EU law, is similar to what Article 130 TFEU states for the tasks and duties conferred on the ECB by primary law. ²⁵ The prudential supervisory powers assigned to the ECB are significant. Not only has it been vested with what the General Court has referred to as ‘the exclusive competence’ ²⁶ to authorize credit institutions and to withdraw authorizations of credit institutions, but it has also been directly put in charge of the prudential supervision of ‘significant’ credit institutions in the Eurozone. ²⁷ Moreover, the implementation of the direct prudential supervision of ‘less significant’ credit institutions by national competent authorities takes place under the ECB’s control. ²⁸ These powers come paired with a rather broad and unquantified objective in Article 1 SSM Regulation: ‘(…) contributing to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State (…)’.

B. The ECB’s precarious constitutional position

The Whatever-It-Takes approach to monetary policy in the crisis and its albeit not unrestricted judicial affirmation have consolidated the ECB’s position as an independent monetary policy authority in the face of a crisis, while its assigned role in the ESM (and much more so in the SSM) have structurally widened its sphere of influence. Yet, the flip side is that the ECB has been confronted with an unprecedented degree of contestation, while its enhanced role comes with its own set of risks for its position.

During the crisis, the ECB has been openly criticized, and its measures have not only been questioned by civil society actors and academics, ²⁹ but also by government officials and politicians, including most notably those from the countries and political parties that have traditionally supported a politically insulated conservative central bank, such as Germany, ³⁰ finding its provisional climax in the review of the announced OMT programme in Gauweiler, and, thereafter in Weiss and others on the PSPP. ³¹ Contrary to any previous common practice, euro-area national central bank governors participating in the ECB’s Governing Council (‘Governing Council’) have also openly expressed their discontent with the ECB’s approach to monetary policy, mainly for being too lenient. ³² Cracks in the consent-oriented decision-making culture of the Governing Council have emerged, as details of the deliberations and voting behaviour have leaked, notwithstanding the applicability of strict secrecy rules, revealing divergent monetary policy preferences and suggesting the formation of potentially opposing policy camps. ³³

The contestation of the ECB’s activities and the ensuing pressure on its position has not remained confined to its monetary policy stance. ³⁴ The before-mentioned role of the ECB in ESM and namely the establishment and review (as part of the so-called Troika) of the anything but uncontroversial Economic Adjustment Programmes and the underlying Memoranda of Understanding on Economic and Financial Policies and on Specific Economic Policy Conditionality ³⁵ has put the ECB into the public spotlight, as it is perceived to be one of the key players in crisis management. ³⁶ This has raised questions concerning the legitimacy of the independent ECB in performing such a role, namely because the Troika (and thus also the ECB) ‘(…) has been perceived as being unclear and lacking in transparency and democratic oversight’. ³⁷

There is a considerable gap between the highly complex legal framework governing decision-formation and -making inside and outside of the EU structure pertaining to EMU and the public perception of who the main actors are in the various policy- and decision-making processes. Instructive in this regard are the several cases brought against the ECB before the General Court, and, on appeal, before the CJEU, by depositors who had lost their savings held by Cypriot banks as a result of a ‘bail-in’ operation under Cyprus law to recapitalize two Cypriot credit institutions in financial distress. This operation formed part of the Macroeconomic Adjustment Programme that Cyprus had concluded with the ESM in order to receive financial assistance. Different to what had been submitted by the plaintiffs, in the assessment of the General Court and thereafter by the CJEU, neither the contested Eurogroup statement in support of the key elements of the economic adjustment programme for Cyprus (case Mallis and Malli), nor the Memorandum of Understanding itself (case Ledra) were attributable to the ECB (or the European Commission for that matter), as the ECB has been considered to have no decision-making powers in either the Eurogroup or ESM. ³⁸ Albeit certainly not entirely unproblematic from the point of view of judicial protection against austerity measures, this assessment of the ECB’s formal powers is legally defendable. ³⁹

It is the seemingly central role of the ECB in all decisions pertaining not only to the single currency, but also the Eurozone at large, that has every potential to tarnish its image as an apolitical expert body with a clearly circumscribed policy mandate, in particular when considering the distributional effects of the actual decisions with which it is being associated namely in the context of the ESM. ⁴⁰ Yet, it is this perception of the (limited) role of the ECB that has arguably been the foundation of the acceptance of its scope of independence within the EU constitutional order. ⁴¹

What is more, the post-crisis legal framework comes with its own set of inherent risks for the ECB’s position as an independent monetary policy authority. First, there is the structural link between monetary policy measures and financial assistance through the statutory involvement of the ECB in the ESM and the coupling of monetary policy measures to financial assistance programmes. Tuori has rightly raised the question over the effects of the sovereign debt purchases by the ECB on ‘(…) the institutional balance in the broader euro area macroeconomic management framework, particularly the Eurosystem’s relationship with the Member States as well as with the ESM (…)’. ⁴² More concretely, one may wonder how autonomous the ECB would have been in deciding on the actual implementation of the announced OMT given that it would have effectively subjected this decision to the essentially political decision on financial assistance and the accompanying programme. ⁴³ In the order for a preliminary reference in the OMT case, the German judges sought reassurance in the observation that

(…) due to the independence of the European Central Bank as laid down in Art. 130 TFEU, the [Governing] Council of the European Central Bank wants to, and must, decide independently, and ultimately without being tied to the decisions of the European Financial Stability Facility or the European Stability Mechanism, whether, to what extent, and under which conditions it may purchase government bonds in selected cases (…) and/or to stop a purchasing programme that it had started. This inevitably requires independent economic assessments which must not merely retrace the decisions of the Commission, the so-called Troika or other institutions (…). ⁴⁴

The ECB’s new prudential supervisory role is also not entirely free of risks for the independent conduct of monetary policy in the euro area, despite attempts of the drafters of the SSM Regulation to organizationally separate the monetary policy tasks from the prudential supervisory tasks, ⁴⁹ namely by vesting the ‘planning and execution’ of the ECB’s tasks with a new internal body, the Supervisory Board. ⁵⁰ Even if the SSM Regulation calls for the operational separation of the Governing Council’s monetary and supervisory functions, including strictly separated meetings and agendas, the fact remains that the main monetary policy decision-making body of the ECB is currently formally also in charge of all prudential supervisory decisions taken at the central level of the system. ⁵¹

The unification of monetary policy and prudential supervisory tasks is certainly not uncontroversial. ⁵² Limiting the present observations to potential disadvantages, it has been observed that the assigning of prudential supervisory tasks to a monetary policy authority can give rise to perverse incentives and biased decision-making as there can be a trade-off between the monetary policy objective of price stability and financial stability. ⁵³ With regard to the ECB, such a conflict of interest may for example arise in the context of the ECB’s power to object to temporary emergency liquidity assistance provided by national central banks, a risk that the ECB is acutely aware of, ⁵⁴ but also as a result of adverse effects on the banking system of a change in interest rates. ⁵⁵ Moreover, spillovers may occur, as a prudential supervisory failure may also have negative reputational effects on the ECB in its role as monetary policy authority.

A. The ECB as a game changer and (perceived) veto player

Namely through its determined monetary policy intervention and by accepting a role in the drafting and monitoring of the macroeconomic policy conditions attached to the financial assistance granted to euro area Member States, the ECB has become a game changer during the crisis, while at the same time being at least perceived as a veto player alongside political institutions. ⁵⁸ To be sure, while it can be defended that the ECB’s unconventional monetary measures have been geared towards pursuing its primary objective of price stability, they have certainly also stabilized the Eurozone as a whole, providing European and national elected politicians with the badly needed breathing space to determine their own strategy and (legal) response. ⁵⁹

It is arguably by the very nature of the powers vested in this institution that at crucial moments during the crisis the ECB has found itself in a position in which its action could and in some instances have been decisive for the future of the Euro, the Eurozone, and in some cases the financial survival of countries, namely through the voluminous purchase of sovereign debt of euro area countries linked with the temporary suspending of the Eurosystem’s minimum requirements for credit quality thresholds for marketable debt instruments, the adjustment of the collateral framework for marketable instruments, and the power to restrict emergency liquidity assistance. The heavily criticised decision of the ECB in February 2015 to lift the waiver of minimum credit rating requirements rules for marketable instruments issued or guaranteed by Greece as a result of doubts about the country’s successful conclusion of its economic adjustment programme highlight the pivotal role of the ECB during the crisis. ⁶⁰ This decision was taken at a critical point in the negotiations of Greece with its creditors regarding an extension of its Master Financial Assistance Facility Agreement.

Furthermore, the ECB’s participation not only in the drafting, but also in the monitoring of the macroeconomic policy adjustment programmes (culminating in the highly publicized on-site visits in several European capitals by ECB representatives together with the IMF and the European Commission) has contributed to this (perceived) position of the ECB. At stake in some of these instances was nothing less than the economic survival of the country that depended on the payment of the next instalment of the agreed-upon loan. At the same time the ECB could also be seen as actively engaging with national governments in an attempt to convince them of the necessity to adopt economic reforms thought necessary. ⁶¹

While in legal terms the role of the ECB by and large is limited to that of an expert advisor as confirmed by the CJEU, ⁶² in the public perception it is nevertheless closely associated with decisions with (potentially) considerable distributional effects and social impact once implemented through corresponding national measures. ⁶³ In fact, the unconventional monetary policy measures of the ECB are themselves considered to have distributional effects beyond what is associated with monetary policy in normal times. To be sure, it is not presently argued that the ECB has pursued a distributional goal with its crisis measures, something which according to Tucker would go against one of the basic principles underlying the delegation of what he refers to as ‘policy functions’ to independent agencies. ⁶⁴ Yet, the fact that the ECB’s crisis measures have been geared towards its monetary policy objective by safeguarding the appropriate monetary policy transmission and the singleness of the monetary policy does not rule out that such measures can have distributional effects. ⁶⁵ It is the latter that may have an eroding effect on the public acceptance of the independence position of the ECB in the EU constitutional framework. As Vujčić has observed: ‘Issues on democratic legitimacy arise primarily within the redistributive realm of monetary policy, i.e. when monetary policy does somebody else’s job’. This may be so because: ‘[i]n a democracy, we typically assign policies that are purposely and predominantly distributional to elected officials.’ ⁶⁶

B. Reconsidering the ECB’s accountability framework

As the current accountability framework applying to the different tasks of the ECB is mapped elsewhere in this issue, ⁶⁷ what is presently stressed is the need to reconsider this framework in the light of the findings of this contribution; a framework that, as far as the ECB’s monetary policy function is concerned, dates back to the original Maastricht framework. Indeed, with the exception of the SSM, the described transformation has taken place on the basis of the existing powers and instruments assigned to the ECB in primary EU law. As such, the developments during the crisis reinforce arguments submitted in the past in favour of more robust accountability arrangements for the ECB. ⁶⁸

Focussing on the establishment of a credible supranational monetary policy authority through an unprecedented insulation of the ECB from political influence, ⁶⁹ the drafters of the Maastricht Treaty have failed to introduce meaningful accountability arrangements beyond the indispensable but inconsequential review of the ECB’s action: instruments with which consequences could be assigned to such reviews or which would, under strict conditions, allow for the overriding of ECB measures. Indeed, based on the legal arrangements provided in primary EU law, the ECB not only ranks among the most independent central banks, but is also among the least accountable ones. ⁷⁰

Both before and since the crisis the ECB has undoubtedly made considerable efforts to explain its monetary policy strategy and the individual monetary policy decisions in much greater detail and through many more channels than the drafters of the ECB legal framework had envisaged. In this regard, possibly the most significant development in practice has been the establishment of the regular exchanges between the ECB president and the relevant European Parliament (EP) committee in the so-called monetary dialogue, ⁷¹ which has since become the new standard not only in economic policy coordination, but also in prudential supervision. ⁷² Regardless of whether these exchanges add a meaningful mechanism for European parliamentarians to gain information on the ECB’s strategies and the rationale of the measures taken, and moreover provide them with an opportunity to challenge ECB officials on the ECB’s performance, the fact remains that at the end of the day neither primary nor secondary EU law grant any effective instruments at the disposal of the EP to assign consequences to its assessment of the ECB. Yet the latter is arguably necessary to provide for a robust foundation for the democratic legitimacy of the ECB and its activities, one that is based on more than just the initial will of democratically elected governments to transfer monetary policy and prudential supervisory tasks onto an independent EU institution.

The assigning of prudential supervisory tasks to the ECB has certainly added further complexity to the accountability debate. First, contrary to the price stability objective in primary EU law and similar to what can be observed for other prudential supervisory bodies, the rather broad and vague objective assigned to the ECB by the SSM Regulation makes it difficult to define an adequate yardstick/benchmark based on which the ECB’s performance as a European prudential supervisor can be evaluated. ⁷³ What is more, a first qualitative review of actual supervisory dialogues between the EP and the ECB suggests that the application of different accountability regimes for the monetary policy and prudential supervisory tasks of the ECB is not always easily grasped by parliamentarians. ⁷⁴

One particular area in which the legitimacy of monetary policy has undergone a positive development is judicial review. Even if vested with a large degree of discretion, the ECB is not above the rule of law when it comes to its conduct of monetary policy and even – at least as far as non-contractual liability is concerned – when it comes to its action in the context of the ESM. ⁷⁵ Yet, new challenges arise from the fact that the ECB is currently charged with two distinct but nevertheless closely interwoven tasks, the nature of which stands in the way of a one-size-fits-all approach to judicial review of the ECB’s action. ⁷⁶ Lehmann has pointed out that banking supervision cannot be equated to monetary policy, arguing that the former is ‘a purely administrative and legalistic task’ not involving policy decisions of the type applicable to monetary policy. ⁷⁷ This has consequences mainly when it comes to the differences in the standard of judicial review between prudential supervisory and monetary policy decisions, as the former ‘(…) should therefore be subject to a similar level of scrutiny as other administrative authorities’. ⁷⁸ Recent case law suggests that the General Court is doing just that. ⁷⁹